Despite Unconstitutionality, Kentucky Enacts Consumer Use Tax Notification Requirement for Out-Of-State Retailers

On April 4, 2013, Kentucky Governor Steve Beshear signed into law HB 440. The bill includes an amendment to Kentucky’s tax code which will impose a new requirement on every retailer that makes sales into Kentucky from outside the state and that is not required to collect Kentucky use tax. The law requires that these retailers provide a notice to their customers that Kentucky purchasers are required to report and pay use tax directly to the Kentucky Department of Revenue. A similar provision enacted in Colorado in 2010 as part of a broader notification and reporting bill was declared unconstitutional by a federal judge in Direct Marketing Association v. Huber, a case now on Appeal before the 10th Circuit Court of Appeals. Brann & Isaacson is counsel to the DMA in the Colorado litigation.

While three other states—Oklahoma, South Dakota, and Vermont—have similar consumer use tax notification requirements on the books, Kentucky’s new law is more aggressive:

First, on its face, Kentucky’s law requires retailers to use “the exact required use tax notification language” set forth in the statute concerning compliance with Kentucky law, and does not include a substantial compliance provision likes other states. According to the statute, even if a seller already has a notice provision for other states, that notice provision is only adequate for purposes of Kentucky law “if the consolidated notification meets the requirements of this section.” In other words, only the “exact” language of the Kentucky law, and not something substantially similar that a retailer adopts in response to another state’s notification law, appears to be allowed.

Second, the Kentucky statute expressly applies to “online auction Web sites.” It is not clear whether the requirement is meant to apply to the auction site itself, or whether it means that retailers selling through an auction site must arrange for display of the notice with respect to their own sales. But note that there is a small seller exemption that exempts any retailer with sales of less than $100,000 to Kentucky residents from having to comply with the statute.  This may lessen the impact of the Kentucky law on Internet auction sites.

Third, while South Dakota and Vermont each provide that there can be no civil or criminal penalties for a retailer’s failure to comply with the use tax notification provision, Kentucky has no such non-enforcement clause. The Oklahoma statute is likewise silent on enforcement and, in practice, the Oklahoma notice law has not been enforced by the state’s Tax Commission. It remains to be seen whether the Kentucky Department of Revenue will bring enforcement actions, but nothing in the new law appears to prevent it.

For more details on the new Kentucky consumer use tax notification statute and how it might affect an out-of-state retailer’s website check-out screens and catalog order forms, ecommerce vendors and other remote sellers should consult their tax advisors.